Use 'Drawdown' to purchase 'Annuity'?

[MaccA]

Hello everyone,

I'm hoping someone can answer this very basic question. A significant amount of Googling has not resulted in a definitive answer, possibly because the answer is too simple. Apologies if you have answered this before, feel free to link me to existing discussions.

Q: If someone uses the 'Drawdown' option when claiming their pension can they later use the remaining pot of capital still invested to buy an annuity? And if so, are there any tax implications on the pot of money?

For example, I want to take the 25% tax-free lump sum now (I am 65) but leave the remaining 75% invested to grow (hopefully). Once I feel the need to increase my monthly income I would then take the remaining 75% capital and purchase an annuity with it.

Would there be any tax to pay on the 75% when I purchased the annuity, or would I just pay tax on the monthly income the annuity would provide over the Personal Allowance threshold?

An annuity is attractive because I am disabled with a shortened life expectancy. However, I do not need an increase in income just yet, so would like to leave the 75% capital invested to keep growing until I do.

Sincere thanks for taking the time to read and respond.

Andrew

HappyHarry

[MaccA] wrote: »

Hello everyone,

I'm hoping someone can answer this very basic question. A significant amount of Googling has not resulted in a definitive answer, possibly because the answer is too simple. Apologies if you have answered this before, feel free to link me to existing discussions.

Q: If someone uses the 'Drawdown' option when claiming their pension can they later use the remaining pot of capital still invested to buy an annuity? And if so, are there any tax implications on the pot of money?

For example, I want to take the 25% tax-free lump sum now (I am 65) but leave the remaining 75% invested to grow (hopefully). Once I feel the need to increase my monthly income I would then take the remaining 75% capital and purchase an annuity with it.

Would there be any tax to pay on the 75% when I purchased the annuity, or would I just pay tax on the monthly income the annuity would provide over the Personal Allowance threshold?

An annuity is attractive because I am disabled with a shortened life expectancy. However, I do not need an increase in income just yet, so would like to leave the 75% capital invested to keep growing until I do.

Sincere thanks for taking the time to read and respond.

Andrew

Hi Andrew,

You've got the right idea regarding annuities and tax.

You can take your tax-free cash.

You can then purchase an annuity with your drawdown pot at any time you wish to, whether that be straight away of in 20 years' time, using some or all of your remaining pot.

The only tax you pay is on the income generated by the annuity. This income will be taxed as normal earned income.

Before the pension reforms a few years ago, this is how most annuities were bought, albeit with no gap between taking the tax-free cash and purchasing the annuity.

kidmugsy

[MaccA] wrote: »

I would then take the remaining 75% capital and purchase an annuity with it.

Just for the sake of clarity: you don't "take" - in the sense of withdraw - the money and then buy an annuity, you buy the annuity with the capital within your pension pot. But I dare say that's what you meant.

Given your health I'd think it might be particularly worth your while to use an IFA to do the annuity shopping for you.

But I've never bought an annuity so I'm not speaking from experience.

[MaccA]

Thank you both for taking the time to reply. It is most appreciated. Kidmugsy - I presumed that was the case but thank you for the clarification.

Andrew

bostonerimus

While you might get a boost in the terms of an annuity if you have health issues it’s still the case that an annuity is better value the longer you live. There are a particularly sensitive and difficult set of issues when you are planning with your mortality in mind and having to balance the options and is you might have a less than average lifespan drawdown might be the best option. Obviously though that might not be the most issue to deal with, but sensible financial planning can make more important aspects of life easier.

cjking

I think there is a lifetime allowance check when you buy an annuity, any growth in your drawdown balance before buying the annuity will use up some of your lifetime allowance. Obviously that's only a problem if you don't have enough allowance left, in which case you might have to pay the LTA penalty charge.